Ray’s Take Do you know your net worth? Mathematically it’s the dollar amount by which your assets exceed your liabilities. It can be a nice number to know and it’s important to keep tabs on it. However, it’s not all that important in and of itself. What is important is how closely you are on track to reaching your long-term financial goals.
Realizing that net worth number can be much more difficult than calculating it. There are costs associated with turning pretty much all net worth assets into cash; whether it’s the capital gains tax on selling stock or the Realtor’s fees when you sell a house. Plus, qualified plan money is all pre-tax.
What is truly important is what you do with your net worth. Maybe you have all your money in a bank savings account. It certainly isn’t earning much interest there, which means it’s not doing a very good job of enhancing your cash flow or keeping up with inflation. It’s basically just sitting there. Perhaps safety or liquidity is your current “worry,” but is it the most important issue in achieving your long-term goals?
If you were to make a long-term plan, that asset may need to work harder. Money itself is just a tool. Without a plan it’s impossible to know what is a “good” or “bad” investment.
By shifting your focus away from the amount of your net worth onto formulating a plan, you will be less likely to be distracted by your true enemies – fear and greed. That’s what financial advisers are all about: finding the right balance of risk and growth to improve your cash flow in order to achieve your goals.
After all, the value of your net worth is just a number. What matters is what it can do for you as the bills come in. A million dollars might provide you with $50,000 to live on for 20 years. But what will you do when year 21 begins? It’s the cash flow your net worth assets generate that will take you years into the future, and that’s what everyone needs to remember.
Dana’s Take Check your net worth. If you keep your head in the sand about finances, at least see if your assets exceed your liabilities. Check on the valuation of your home, if you own one. It may need to be adjusted for today’s true market values. The same goes for cars.
Chances are that if your lifestyle keeps up with the Joneses, not much black ink may remain on the bottom line. Especially if you’ve been paying multiple tuitions and the expenses of teenagers, the accounts may be drained.
Face it now and start making choices that will brighten your financial picture. Maybe Junior can get a job and pay his own expenses, including a car.
Sharing your net worth numbers with the family might be a wakeup call for everyone to get real about money.